Louisiana-Pacific Corp (LPX) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Corporation first-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to hand the meeting over to Sallie Bailey, Chief Financial Officer. Please go ahead.

Great. Thank you very much, Karen. Good morning. Thank you for joining our conference call to discuss LP's financial results for the first quarter of 2016. I am Sallie Bailey, LP's Chief Financial Officer. And with me today are Curt Stevens, LP's Chief Executive Officer, as well as Mike Kinney and Becky Barckley, our primary investor relations contacts.

I will begin the discussion with a review of the financial results for the first quarter of 2016, and these will be followed by some comments on the performance of the individual segments and selected balance sheet items. After I finish my comments, Curt will discuss the general market environment in which LP has been operating and provide his perspective on our operating results and give some thoughts on the outlook.

As we have done in the past, we've opened up this call to the public and are doing a webcast. And the webcast can be accessed at www.lpcorp.com. Additionally, to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides in my comments this morning. We have filed an 8-K this morning with some supplemental information, as well as our Form 10-Q.

I want to remind all the participants about the forward-looking statements comment on slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on slide 3 of the presentation. The appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Now, rather than reading these two statements, I incorporate them with this reference.

The first quarter was a good start to 2016 for LP, and it set us up for continued improvement for the remainder of the year. US housing start data does remain choppy, but the market appears to be on a trajectory for a 10% to 15% improvement over 2015. Overall in the past couple of quarters, we have had a number of questions in meetings and on this call about the market demand for our SmartSide siding. The siding segment's results this quarter demonstrate that we are back on track, given the 22% improvement in SmartSide volume from the fourth quarter of 2015. And with that, let me go into the details.

Moving to slide 4 of the presentation for a discussion of the first-quarter 2016 consolidated results. We are reporting net sales of $505 million for the first quarter of 2016, a 7% increase from the net sales of $472 million reported in the first quarter of 2015.

In the first quarter, we reported net income of $10 million, or $0.07 per diluted share, compared to a loss of $35 million, or a loss of $0.24 per diluted share, in the first quarter of 2015. The adjusted income from continuing operations for the quarter was $10 million, or $0.07 per diluted share, based upon a normalized tax rate of 35%, as compared to a loss of $19 million, or a loss per share of $0.13 reported in the first quarter of 2015. Adjusted EBITDA from continuing operations was $52 million a quarter, compared to $6 million in the first quarter of 2015.

Moving on to slide 5 of the presentation and a review of our segment results, starting with OSD. OSD reported net sales for the first quarter of 2016 of $217 million, up 14% from $190 million in the first quarter of 2015. OSD reported operating income of $15 million, compared to a loss of $29 million in the first quarter of 2015. Adjusted EBITDA from continuing operations was $30 million, compared to negative adjusted EBITDA of $13 million in the first quarter of 2015. Sales volumes were flat.

Pricing for OSB was higher by 14%, which improved operating results by $27 million. The first-quarter 2016 OSB operating results were positively impacted by reductions in raw material costs, high utilization rate, as well as the positive impact of the Canadian currency.

Slide 6 reports the results of the siding business. This segment includes our SmartSide and CanExel siding products (inaudible) minor amounts of OSB. Siding reported net sales for the first quarter of 2016 of $181 million, up 4% from $174 million in the first quarter of 2015. Siding reported operating income of $27 million, compared to operating income of $33 million in the first quarter of 2016. Adjusted EBITDA from continuing operations was $34 million, compared to $38 million in the first quarter of 2015. SmartSide volume was up 1% from the prior year and 22% sequentially. Sales prices in SmartSide were down 2% due to changes in product mix, with individual pricing remaining relatively flat.

For CanExel, sales volume increased 15% primarily due to increased demand in Europe. Sales prices for CanExel were lower by 11% in US dollars. CanExel Canadian dollar sales prices were up 2%.

As a reminder, the Swan conversion from an OSB mill to the siding -- as a reminder, with the Swan conversion from the OSB mill to a siding mill, the siding segment started producing and selling OSB again out of our Hayward, Wisconsin, mill.

During the first quarter of 2016, the siding segment produced about 53 million square feet of OSB, as compared to no OSB production in the first quarter of 2015. The negative impact of the Swan conversion on the siding segment's financial results for the quarter was less than $1 million, and we are not anticipating any negative impact of the Swan conversion in the second quarter on earnings.

The reduction operating results for the siding segment is -- for the first quarter of 2016, compared to the first quarter of 2015, was primarily due to higher cost of sales related to the fourth quarter's higher cost of production due to downside. The higher cost of production in the fourth quarter was capitalized into the inventory, which was then sold in the first quarter.

The cost of production in the first quarter was lower than the cost of production in the fourth quarter of 2015. An increase in OSB production and increased sales and marketing costs to support future growth also contributed to the lower operating results in the quarter. These higher costs were partially offset by lower raw material costs.

Please turn to slide 7 in the presentation, which shows the results from our engineered wood product segment. This segment includes I-Joist, laminated strand lumber, laminated veneer lumber, OSB produced at our Houlton, Maine, facility, plus other related products. This segment also includes the sale of I-Joist and LVL products produced by the Abitibi joint venture under a sales arrangement with Murphy Plywood.

The engineered wood products segment reported sales of $72 million in the first quarter of 2016, up from $65 million in the first quarter of 2015. The segment's results were a loss of $2.5 million in the first quarter of 2016, compared to a loss of $4 million in the first quarter 2015. For the first quarter of 2016, adjusted EBITDA from continuing operations improved by $1 million, as compared to the first quarter of 2015.

Volumes of I-Joist were up 19% while volumes of LVL and LSL were up 18% compared to the same quarter last year. Pricing was up 3% in LVL and up 2% in I-Joist.

Moving on the slide 8 of the presentation -- for the quarter, our South American segment reported sales of $31 million, as compared to $36 million in the first quarter of 2015. Operating income was $5 million, as compared to $2 million in the first quarter of 2015, and adjusted EBITDA was higher by $2 million for the first quarter of 2016, as compared to the first quarter of 2015. Volumes were down 12% in Chile and 3% in Brazil, compared to the same quarter last year.

The sales volume decrease in Chile was due to increased exports impacting local demand and in Brazil due to decreased local sales as Brazil continues to face an economic recession in their local market. On a US dollar basis, pricing was up 1% in Chile and down 11% in Brazil. In local currency, Chile's pricing was up 14% compared to the same quarter in 2015, and Brazil's pricing was 25% higher in local currency.

Total selling, general and administrative expense was $42 million in the first quarter of 2016, compared to $39 million in the same quarter of 2015. For the quarter, the increase in selling, general and administrative expense was primarily due to increases in certain management expenses in 2016 and higher costs associated with corporate sales and marketing to support our revenue growth. Interest expense net was flat between the period.

Please turn the slide 9 of the presentation. As of March 31, 2016, we had cash, cash equivalents, investments and restricted cash of $424 million, working capital of $650 million, net cash of $58 million. And in addition to the $424 million of cash on our balance sheet, we had $2 million of availability on our credit facility.

Capital expenditures through March 31, 2016, were $26 million. We are projecting capital expenditures for 2016 of $120 million to $130 million. Approximately $100 million has been allocated to North American projects, 50% for growth, and the remaining for capital maintenance and cost reduction. The remaining $20 million to $30 million has been allocated to our South American segment primarily for the building of a third mill in Chile.

Now with that, I will turn the call over to Curt for his comments.

Thank you, Sally. Good morning, and thanks for participating on today's call. As I usually do, I'll start with our safety performance.

The American Panel Association just announced the results of their safety and health awards program for 2015. And I am pleased that for the second year in a row, LP was recognized as the safest large company, as a company with more than four mills. This is the sixth time that we've been so recognized in the last eight years.

Our I-Joist JV, which has two mills with Resolute in Quebec, was named the safest small company with three or fewer mills. We had 11 facilities included in the Incident Free Honor Society. The American Forest and Paper Association also released their safety data for 2015 for their universe of companies, and LP was identified as having the best of total incident rate.

I continue to be extremely proud of all of our employees who recognize the value of being safe and committed to it and act accordingly. In addition to the obvious savings and workers compensation costs, LP employees have made their commitment to safety the cornerstone of our Company's culture, which we believe gives us a competitive edge in the hiring and retention of our people.

Finally, this safety culture extends to the many contractors that we use in implementing our capital projects. We have gone over two years without a single contractor injury associated with these non-routine tasks.

We did have our Board meeting and our annual meeting of shareholders last Friday. I am pleased to report that all the nominees for director were handily elected. The honors were ratified, and our annual say-on-pay advisory vote passed with over a 98% approval rate.

Also, our Board did name a new officer. Greg Harrison, a longtime LP manager, has been named Vice President, Siding and Manufacturing as a recognition of his importance to the success of this business. Greg was instrumental in the successful conversion and startup of the Swan Valley mill.

Today, I will be providing comments on our results and accomplishments, discuss key demand drivers and give you my views on the outlook for the rest of this year.

For the second consecutive quarter, all business segments reported a positive adjusted EBITDA that totaled $52 million for the Company. EBITDA improved by $46 million over Q1 of 2015 and by $18 million compared to last quarter. And OSB random links reported North Central 716's Q1 pricing down $17 versus last quarter, but we're actually reporting flat due to an increase in our value-added mix and improved freight realization.

As a result of these significant factors, improved operational productivity and cost control, our EBITDA improved to $30 million versus $25 million Q4. During the quarter, we also successfully completed the press rebuild of our Hanceville, Alabama, mill.

In siding, our SmartSide revenue grew 28% versus Q4, driven by a 22% volume increase. The SmartSide volume matched the highest volume ever that we've achieved in Q1 of last year. The Swan Valley siding mill conversion was ahead of the pro forma production schedule, and we expect this mill to make a positive contribution next quarter.

We are very pleased with the rebound in our siding sales as we put a major focus on returning to growth as we put capacity back in front of this business. As I said last quarter, we have unleashed our sales and marketing team along with our distribution partners, and we are seeing the results.

BWP, we were EBITDA-positive for the quarter and performed better than Q1 of last year. However, we did see a drop in EBITDA performance compared to Q4 last year due to an equipment failure in one of our mills that reduced quarter-over-quarter sales and a change in the mix.

Sallie said in South America we had a very good first quarter with adjusted EBITDA at $7 million. Prices improved in Chile and Brazil in local currency versus last quarter. Strong export volumes to China and other South American countries offset weak domestic demand in Brazil. We continue with the engineering design work for a third mill in Chile in anticipation of Board approval of this project over the summer.

The housing market that Sallie mentioned -- the Q1 news was a little bit mixed. Overall, Q1 housing starts ran an annual rate of $1.13 million, actually flat to Q4 of last year. The consensus for 2016 starts is now at $1.23 million, a 10% improvement over 2015, which I believe is possible. The consensus forecast for 2017 is $1.37 million, another 12% increase.

The good news for us is that in Q1 single-family starts averaged a seasonally adjusted rate of $792,000. This is the highest quarterly rate since Q4 of 2007, and this represents an increase of 23% over the same quarter last year. We believe the good weather in February and March aided starts.

Also notable was improvements in new home demand for entry-level buyers. We estimate that the OSB consumption ratio between single and multifamily is about 3 to 1.

The improvement in single-family starts was offset by a decline in multifamily starts. Compared to Q4 of last year, multifamily starts declined 10%, falling from $379,000 to $341,000, which happened to be flat with last year. Household formation growth continues to drive rising rents and low vacancy rates across the country.

Other positive housing data -- existing home inventory was down 1.1% year over year through January, so home inventory is very tight on historical basis. On the financing side, the average 30-year fixed-rate mortgage rates were 3.58% for the week ended April 15, which was down from 3.92% three months earlier.

In Canada for the first quarter, starts were at a seasonally adjusted rate to $200,000, a growth of 2% from Q4. Almost all of this increase was in single-family detached units, which makes up about 35% of Canadian starts.

So while there is forecast to growth in housing for the next several years, it is incumbent on us to focus on continuing to increase our growth outside of our traditional market by developing products, product applications, and market segments that can address needs and industrial repair model, where year-over-year growth has exceeded 10%, and light commercial activities. Year-over-year nonresidential construction was up 11.2% through February.

So while the consensus for 2016 housing starts has moved down slightly since January, I am encouraged by the increase in single-family starts. And the supporting data for sales of building material supply dealers are up double digits in the first part of the year. So I remain optimistic about the rest of 2016.

As I've said before, I continue to be concerned about labor and land availability for builders, uncertainty relative to lending standards for buyers and the impact of the presidential race on our nation, and more specifically, potentially on consumer confidence. But continued strong employment growth will bolster household formation. And fundamentally, housing demand should strengthen throughout this year, providing a positive market environment for our products.

In our siding business, strong order rates continued through April. In OSB, random links has reported North Central pricing flat or increasing each week since the end of the quarter. So compared to this time last year, pricing is higher by 37%. Strong single-family starts is driving demand for both these businesses as well as engineered wood.

South America, expect good OSB and siding demand in Chile throughout the year. For Brazil, we will continue to focus on export opportunities, as these are generally priced in US dollars and we can benefit from the weak Brazilian real.

With that, let me turn it over to Sallie for questions.

Great. Thank you, Curt. Karen, we are ready for questions if you could go to the queue.

(Operator Instructions) Mark Wilde, Bank of Montreal.

Curt, I wonder if you could talk a little bit about your operating rate in OSB on the first quarter. And also if you could just talk a little bit about the margins in OSB because we've had a couple of competitors report last week. Their OSB margins were quite a bit higher on a reported basis than yours, and I wondered if you could just talk to that disparity.

Yes, our operating rates in the first quarter were 86% if you don't include the Chambord mill. And as a reminder, what we did have in the quarter is we did take a month of down time at our Hanceville, Alabama, mill to do the press rebuild.

As far as the margins, we do focus on the margin compared to our public peers, and we actually made some progress in the first quarter versus the fourth quarter. Fundamentally, in the past we have taken more of the industry down time, so our operating rates have been a little bit lower. I think our public competitors talk about operating rates in about 92%, so we are about 6 points below that.

We do believe that if Hanceville had run all quarter instead of taking the month of down time, that would've probably been another $3 per thousand that we would've added to our margin.

So we are focused on that. I think that fundamentally it's tied to the operating rates and how much we run these operations. We are advantaged a little bit by our value-added percentage, but our competitors also focus on value-added product.

What would the operating rate be down in Brazil and Chile, Curt?

Chile is running 100%. And actually we are adding product from Brazil to Chile as well as North America to satisfy that demand. That's why we are looking at the third mill. In Brazil, we are probably operating about 60%. We have seen local demand fall by about 20% just due to the economy. We've been able to fill that with some of the export business that I talked about earlier.

Okay. And then finally, could you just update us on current market conditions? We had quite a flurry in the -- at least in the reported random links prices last week. I think some of that was tied to the story around the Norboard outage.

I think that's exactly right. Because when that fire was reported at the end of the day on Wednesday and early Thursday, we did see pricing go up on the west side principally, a little bit in the north-central. And I just think that as we go into the quarter, we are closer to -- the demand is closer to the supply and we are seeing a tightening up. I did see that Norboard issued a release today that they expect the outage to only last about two weeks.

Yes. And then last question along those lines. Just with the suppliers so early in the season, do you guys have any view on the likelihood of any kind of logging restrictions or logging difficulties as we move into the summer season?

That's a great question. Sallie and I talk to our forestry group, and we do have fires in the Peace Valley area of British Columbia. There are three fires there that have happened in the last 24 hours. We don't think that's going to affect our operating areas. Where the fires are in Fort McMurray doesn't affect us. It may have some impact on our competitors, but it's certainly not a threat to us.

The other part that we are worried about is the rain we've had in Texas and Alabama. East Texas is 20 inches above normal so far this season. Alabama is 15 inches above normal.

The good news is we did put in inventory at our log decks in the fourth quarter to take advantage of both the lower pricing and to offset maybe some of the risk of this. So we think we are in pretty good shape there. In North Carolina, we've also had heavy rainfall, but we think we are in pretty good shape in North Carolina.

But the fire season in Western Canada is of concern. And so we are going to be very cognizant of that. Fortunately, we've built a pretty good log back at Peace Valley and Dawson Creek.

Okay, great. I will turn it over, Curt. Thanks very much, and good luck in the quarter.

I will see you tomorrow morning, Mark.

You will indeed.

George Staphos, Bank of America.

This is actually John Babcock on the line for George. Just quickly here, with regards to EWP, you as well as some of your peers have done pretty well this quarter from a volume perspective there. And I just want to get a sense for ultimately what factors you look at when you are trying to gauge whether or not the market is tight enough to have some pricing output there. And then also given where the market stands right now, if you see that potential for a price increase this year.

I think the thing that we really look at for engineered wood is single-family. There's a little bit of multi-family activity, but this is largely a single-family, new-construction-driven business. And so the housing starts that we had in the first quarter and where permits are, I think, bodes well for continued demand.

I think the difficulty with a price increase is that we do have a lot of excess capacity in this business. And we just have to be cognizant of that. We did have a recent consolidation, and that has created some turmoil in the market as producers are pursuing new business or customers are looking for new business partners. So there is -- I would characterize Q1 as a bit of turmoil, and it's probably going to extend into Q2.

That's probably -- when you have that kind of turmoil, it's probably not a time for a price increase. But I can see the second half of the year, at least LP, considering price increases, as we will see higher raw materials particularly on the OSB side.

Okay. And then just next on the siding side of things, you talked a little bit about how ultimately you try to get your sales force out there and other factors that drive volumes there. I was just wondering were there any market factors that also might've helped you, or was there any sort of volume pull-forward that also might've driven things there?

No, I think it is just the opposite. I think we did have -- because we were an allocation last year, I think last year's Q1 was inordinately high. So if you average that with Q2 of last year, that's probably where the running demand was in 2015. The good news for us is we are seeing order rates that are higher in Q2 than we did in Q1, which means there's not much inventory in the channel. And what we are hearing from our distribution partners is what they are taking is leaving their yards. So I think that's good news for us looking forward.

Okay, great. Thanks. I think that's all I have for now.

Bill Hoffmann, RBC Capital Markets.

Curt, can you talk a little bit about your success or how you are doing on some of the growth in industrial applications, et cetera, on the OSB side?

Very circumspect, I will talk about that, because I don't necessarily want all my public competitors to know how we are doing in that. We do have -- I think we've talked a little bit about growth and innovation in the past. We are spending a lot of resources looking at alternative markets to traditional single-family/multi-family housing. And we are having some success. But as I think everybody on the phone realizes, it's hard to get a new product in the market and have a big revenue impact on the first year or two. But we are certainly setting a foundation for continuing to grow. I'll give you a few examples.

We went into the furniture market in 2009 right when we were in the midst of the downturn. Took us a while, but now most furniture manufacturers have converted to OSB from plywood. That's benefited not just us, but it's benefited the entire industry.

With our fire-retardant product, we actually introduced that about five years ago, and now we are adding a second production facility so we can satisfy market demand. Hopefully right after that, we will buy the third manufacturing facility so we can do that.

So it's a little slow taking off, but I am pleased with the progress. When I look at the funnel of projects we've got, it's very robust. We are limiting where we put our resources to those high priorities, but I feel pretty good about it. And our goal is to have 50% of the overall Company at a high value-added margin products in the next couple of years.

Great. Thanks. And then just with regards to South America and Chile, given some of the issues down there, any thoughts on slowing down your project -- expansion project down there? Or what do you think the market condition is going to look like going forward here?

I think that project is going to be somewhere around $60 million to put another mill down there. Today, the product that we ship from either Brazil or from North America ends up not providing any margin to the corporation because we give it all to the transportation company. That's about $100 to $110 bill. So if I can put that mill in place and captured that $110 per thousand, I have a pretty immediate return on that that is significant.

So it's really just having the local production. Plus the other thing that's going on is we are seeing Argentina bounce back with the new government. We are seeing Columbia become a stronger economy, and we have long had sales into Peru. So I think there's great growth opportunities for us both in margin and in product.

Great. Thanks, and good luck.

Chip Dillon, Vertical Research.

Sally, you mentioned that there was probably about $1 million, I think you mentioned, in terms of the inventory. I want to make -- or maybe I got my terms mixed up. But how much was that inventory adjustment in the siding business? You mentioned you had higher cost capitalized in inventory as you went through the first quarter. So did you actually tell us what the impact of that was?

No, Chip, we didn't really quantify it. But it did impact -- it was a piece of why we had higher sales and lower EBITDA in the first quarter of 2016 relative to the first quarter of 2015.

And I guess on that, it seems like I remember from a year ago you had some very strong shipments in that first quarter of 2015, and that you all correctly let us know that maybe some of the -- what normally would have been felt in the second quarter was pulled forward. Did you see that this year, or should we see a more normal progression from first to second?

We think there should be a much more normal progression from first to second, similar to what you would've seen in years like 2013 and 2014.

Okay, okay. And then I guess getting back on the OSB situation, it looked like you had a big pop in the benchmark from midweek to the end of the week last week. And not to split hairs about day-to-day, but it seemed like the other regions were only -- the north-central went up 16% or 18%, but the other regions only went up about 7% or 8% percent. And I guess in terms of your business, did you really see any change in behavior on the part of your customers in response to the high-level shutdown, or not really?

We did see a response. I think all of our partners on the West Coast are concerned about getting sufficient volume to satisfy their customer demand in the second quarter going into the third quarter. So, in my view, Western Canada was a direct reaction to the fire.

Okay. And then the last question is I would imagine you are selling more of your product down here than you are making here. I would suppose that some of the Canadian production comes down here, and that certainly helps your OSB margins given how weak the C dollar had been. But it has strengthened of late. And I just didn't know if you could give us some help in terms of how you think your costs are going to flow through in the next couple of quarters in OSB, either based on the C dollar being stronger, or maybe there are other cost issues like resins that you could help us get arms around.

What we have said in the past is that a penny for the Canadian dollar is about $2 million annualized. And that's still probably a pretty good number. So each penny change would either raise or lower it by about $2 million. That assumes the same amount of product comes down. So it does fluctuate, but that's a good rule of thumb.

And we haven't specifically quantified for OSB the improvement in our material costs. But we have said that we thought this year -- as you will recall, 2015 we saw a lot of improvement due to raw material costs. We thought 2016 would look similar to 2015, and we haven't really come off that. For a while, I think we would have thought oil would -- and resins would help us a little bit. That may still be the case. We will just have to see where oil -- what happens with oil as we go further.

Okay. All right. Thank you.

Mark Weintraub, Buckingham Research.

One question on pricing for OSB. Obviously, it has continued to move higher. A competitor of yours indicated that their average prices in April had been up about $15 versus the first quarter, and then they gave some color on where they were now versus April. Could you provide a similar type of framework for us?

I think it's tough. I will do that in July.

Okay. And obviously a lot of good news in the quarter. But one area where you do on a relative basis seem to continue to struggle quite a bit is that engineered wood business, where some of your competitors are doing a lot better. Any thoughts as to what the relative issues might be at this point?

We did a -- we do a competitive analysis every quarter of looking at what is publicly available, and it's a little tough because some of our competitors include plywood in that and MDF and particleboard. Some include their distribution operations. So you can't really see what the pricing is.

But when you look at a relative change between quarters, both in the last quarter and then the same quarter the prior year, and from a relative change basis, we were pretty consistent both on a volume standpoint and a pricing standpoint with our competitors and the industry.

What hurt us in the first quarter is we did have one of our press lines for LVL did go down on the East Coast, and we had about a month outage. And what we did is we replaced that volume to satisfy our customers' needs with the production that we get out of Murphy Plywood where we sell that with basically recovering our sales costs, but not any manufacturing margin. So our volumes were good, but we had to replace it with manufactured product outside.

The other thing, when you look at our margins versus our competitors, just to remember is that the Abitibi joint venture in Quebec, we only get half of that margin because we share it with our partner. But we also only have half the investment in that. So I believe our numbers were about $2 million lower than they should have been due to that -- due to the fact of having to satisfy our customers out of the Murphy volume.

Okay, that's helpful. And lastly, if you could just give us an update on cap spend expectations for this year and if there are any very early reads for next year.

Mark, we are continuing to forecast very similar to what we said in the first quarter. We are now at $120 million to $130 million, down a little bit from what I said three months ago. Still $100 million in the US, and the $20 million to $30 million is in Chile primarily for the -- or South America, but primarily for the third Chilean mill.

Great. Thanks very much.

Mark Connelly, CLSA.

Curt, you said that you think you're going to be okay with fiber despite the rains and floods and fires. Are you worried about risk to average prices if you end up with competitors who are scrambling in those same regions?

I think the risk is that commodity pricing will go up, which is a good risk to have. If you can't get fiber, then the end product is going to go up. I don't think that we are going to see any -- well, we could see some short-term pricing. But we have a strategic supplier program, and we've got long-term relationships with most of our fiber suppliers. So I don't think that's going to be a significant risk. It may be a spot risk, but not significant.

Sure. Okay. And if you could -- just changing gears, can you talk about how you are thinking about OSB acquisitions? If something came up now, how much you might be willing to stretch the balance sheet? And whether your thinking is any different after Ainsworth about what makes sense.

Ainsworth was a very difficult process. I think if there were a one-off mill, we would consider it. I think anything of scale, I am committed to waiting until we have a change in administration, a change in view. If you just look at the public comments on the difficulty of GP buying or selling two relatively modest engineered wood operations to Boise, it tells me if I do anything of significance it is going to be a little bit problematic.

Okay.

So --

Mark, it may be worth noting that the, in particular, Aspen -- mills that are located in Aspen-based regions would be interesting to us because our siding business is primarily -- is Aspen-based.

Sure. That's very helpful, and especially with the GP problems. Thank you.

Mark Wilde, Bank of Montreal.

Sallie, can you just walk us through if possible financially how the ramp on Swan Valley will look as we move through the year? I think you said it was about a $1 million drag in the first quarter. And it sounded like it was at least breakeven in the second quarter. And I'm just curious about how that sequences into $3 million and $4 million.

I think what you need to do, Mark, is really go back and think about what happened in the third and fourth quarter of 2015. And what we said -- and I know it was $10 million for the whole year. I think it was $4 million -- (multiple speakers). Okay. So, Mark, we believe it was $6 million in the third quarter and $4 million in the fourth quarter -- other way around -- $4 million in the fourth quarter and $6 million in the -- $4 million in the third quarter and $6 million in the fourth quarter. So, $10 million for the whole year.

And so I think the best way to think about that is we said it was less than $1 million in the first quarter, and we don't anticipate any negative drive in the remainder of this year. And so at this point, it just will be fully incorporated into our siding business. And we would -- don't expect it to be any different from any of our other siding mills, albeit the ramp-up will be fully completed by the end of this quarter.

Okay, all right. And then Curt, any sense that you can give us of what the underlying growth rate is for your siding business in your view?

If you just take the market and look at the mix between repair/remodel, new home construction, the retail business, the inherent growth rate is 7% to 8%. So penetration, we think, is another 5% to 6% on top of that. So I think you are 13% to 14% overall. If some of these new products really take off on the marketplace, will be higher than that.

Yes. Any thoughts on the -- how you think about the potential of having another player coming to the market?

I think it has been rumored for a long time. I just think that there would be a big uphill climb. We have a 25-year history of product reliability and warranty information. We've got a sales force in the field that's now 140 people strong and marketing to support that. It's a different kind of sale than is commodity OSB.

And then, as you know, we spent $85 million converting Swan into a siding mill. So there is a little bit Of capital that goes into it. And I think I mentioned On the first-quarter call, Swan Valley has one of our most experienced mill teams. You know what? It wasn't easy for them. That's even with having that augmented with people from our siding mills to help them with that ramp-up. Because, unlike OSB, if you have a flaw in the face of the panel, it is downgraded. You can't continue to ship it. So it's a tougher standard for an external product that is going to remain to be seen. It wouldn't surprise me, but we've heard it now for 10 years that we were going to come into the business.

Nobody -- okay. All right, last question I had. Sallie, it seems like, even away from just fuel prices, that conditions in the freight markets have eased from where they were a year or two ago. Are you getting any benefit from lower freight costs either coming through on the rails or from a trucking standpoint?

Yes. Nothing that merits mentioning, Mark. I think we are staying pretty similar to rate -- pretty similar to where they were last year.

Mark, I will comment on that. They put fuel surcharges in for the rail companies and trucking companies and the airline industry, and none of them have come off. It doesn't make any sense (multiple speakers).

Yes.

I know. But look at the airlines. You've got a fuel surcharge on your airline ticket every time you buy one. And that's -- they don't come off generally.

What I will say is probably due more to weather than anything else. We did not have any rail disruptions in the first quarter. And that is -- if you go back to 2013 and 2014, it was terrible. So we actually had a very good (multiple speakers).

Yes, so costs may not have come down, but the logistics (technical difficulty) of them less daunting. Is that correct?

That's exactly right. And as I mentioned, particularly in our OSB business, we were able -- because of that reliability, we were able to change how we treated reloads and how we treated inventory because we could rely on them to get the product to the customer. And part of the improvement we had in pricing was better logistics.

Okay, that's helpful. I know between raw materials coming in and OSB and siding going out, freight is a really important piece of your cost structure.

It is.

Yes.

Okay, very good. And I will turn it over. Thanks.

Paul Quinn, RBC Capital Markets.

If you could talk about your inventory levels on the OSB side, where they are right now, and whether they have dropped year over year.

We actually ended up from where we were in the fourth quarter. And we are also up from where we were on finished goods in the first quarter of 2015. We did take them down pretty significantly in the fourth quarter of 2014 -- I'm sorry -- the fourth quarter of 2015 and intended to bring them up. And I would say they are ready to serve the customers' demand that we have.

Okay. And then how would you characterize your customer inventory levels?

Same as we've been really talking about it for the last couple of quarters. We don't think there's a lot of inventory in the system right now.

Okay. And then just on the cost side, you mentioned resin pricing that you have really -- it sounds like you Q1 was flat to last year and you might expect a tailwind at some point during the year. But what have you seen on the fiber side?

I would say on the fiber side, we saw improvement primarily in OSB, a little bit in siding. And I don't want to -- we did see some improvements in -- I think I mentioned this in my comments -- in resin pricing and (technical difficulty) relative to the first quarter of 2015.

Okay, any -- on Chambord, eventual start-up? Any update on timing of that start-up? And change there?

Certainly not this year.

All right. And then just lastly, I think Sally, you mentioned CanExel -- something about Europe. Just curious as to how much of that CanExel product line gets sold in Europe.

The majority of it actually is Central Europe. No, the majority is in Canada, and then probably, what, 10% to 15% is sent to Europe.

10% to 15%. Okay, that's all I had. Best of luck. Thanks.

John Tumazos, John Tumazos Very Independent Research.

The (multiple speakers) two-week outage, about 35 million square feet. Big picture, doesn't seem to be that much. Maybe 3% of your quarterly volume, for example. Is the devil in the details or the logistics of getting product to market in the Western region where the distances are large? Is the trucking capacity available to move volumes a few hundred miles out of their normal routes?

It's all in the mind of the buyer, John. This is an emotional response. It's a response with incomplete information. As information becomes available, then, no, I think buyers will modify their behavior. But this was an emotional response.

And we get that -- for instance, when Martco announced they are going to build a new mill, pricing went down but that mill is not going to be in operation for 2.5 years. But it really is psychological. And if a buyer can't get the wood, they have a tendency to raise price.

For your two mills in BC, Peace River and Dawson Creek, do you anticipate any difficulty getting fiber? Are the foresters going to put down their logging equipment and go fight a fire somewhere?

Typically at this time of year, you are not logging. So whatever you are going to run through the mills has to be already sitting in the log yard or in a satellite log yard. So our foresters won't be in the woods until next month at the earliest. Is that right, Mike? So they won't be in the woods until next month. And then if there is fire -- a fire danger, they may limit what areas they can operate in. So we fundamentally have enough wood in our yards to run through the middle of July in both Peace Valley and Dawson Creek.

Thank you.

Great. Thank you, John. Karen, I think that's all the time we have for questions. So if you could please provide the replay number. And I would like to thank everybody for participating in our call today. As always, Mike and Becky are here to answer any follow-up questions you may have. Thank you, and have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.